Public Bill Committee

[Mr. Roger Gale in the Chair]

Roger Gale: I apologise for the delay, which was entirely my fault. I remind hon. Members that the deadline for tabling amendments to be considered on Tuesday 5 January is 4.30 pm on Wednesday 30 December. It will be possible to table amendments during the recess.

Clause 16

Performance of controlled function without approval

Amendment proposed (this day): 14, in clause 16, page 20, line 7, leave out P and insert the authorised person.(Mr. Hoban.)

Question again proposed, That the amendment be made.

Roger Gale: I remind the Committee that with this we are discussing the following: amendment 15, in clause 16, page 20, line 8, leave out P and insert the authorised person.
Amendment 1, in clause 16, page 20, line 10, leave out from P to end of line 14 and insert either
(a) (i) did not know, and
(ii) could not reasonably be expected to have known,
 that P was at that time performing a controlled function without approval, or
(b) was instructed to undertake these activities by an authorised person or where the authorised person was a company director or officer, who was an approved person..
Amendment 16, in clause 16, page 20, line 24, after the, insert authorised.
Amendment 17, in clause 16, page 20, line 34, leave out second a and insert an authorised.
Amendment 18, in clause 16, page 20, line 37, leave out second a and insert an authorised.
Amendment 19, in clause 16, page 20, line 40, leave out second a and insert an authorised.

Ian Pearson: It is a pleasure to serve under your chairmanship, Mr. Gale, for this afternoon sitting of the Financial Services Bill Committee.
This morning I was stressing the importance of credible deterrents. The Government recognise that the enforcement powers that allow the Financial Services Authority to penalise individuals must be carefully framed to ensure that they are proportionate and fair. As I shall set out in a moment, I am confident that the clause provides sufficient checks and balances to ensure that penalties on individuals are appropriate and proportionate.
As I am sure the Committee is already aware, certain roles in authorised firms can be performed only by individuals who have been approved by the FSA. Such roles are known as controlled functions and apply to director-level or significant management functions, and also to certain customer-related roles. The FSA approves an individual to perform such functions if he or she is determined to be fit and properthat is, if the FSA is satisfied with the persons honesty, integrity and competence, among several other criteria.
Amendments 14 to 19 seek to make a firm responsible for paying the fine if one of its employees performs a controlled function without approval. That would take the onus and responsibility away from the individual to ensure his or her own approval, and place it wholly on the firm. However, the power to fine a firm if it fails to take reasonable care to ensure that controlled functions are performed only by approved persons already exists. It is set out in sections 59 and 206 of the Financial Services and Markets Act 2000. In that respect, the proposed amendments are unnecessary.
In addition, the amendments would remove responsibility from the individual employee; it would remove any incentive for the individual voluntarily to initiate the approvals process with his or her firm if only the firm could be punished for non-compliance.
The FSA wants and needs to improve compliance with the approved persons regime to ensure that all who undertake key functions are properly vetted, and are found to be fit and proper to undertake those functions. As I said, many of the controlled functions include senior management roles, and it is right that the FSA should satisfy itself that the individual in question has the ability and necessary credentials to undertake the relevant function.
Credible deterrents need to target individuals and firms. Both need to be discouraged from bypassing the rules, but currently the only enforcement action the FSA can take against individuals who perform such a role without approval is to prohibit them from working in the industry, and even then only if they are not considered to be fit and proper. There is no power to fine such individuals.
That is why the Government have proposed to give the FSA the power to fine an individual who has performed a controlled function without the necessary approval. In effect, the proposal closes a loophole whereby one way of avoiding a possible financial penalty is simply not to be approved for the relevant activity.
Let me turn to amendment 1. I understand that the intention of the hon. Member for Fareham is to provide added defence for the individual. However, the amendment would create an almost limitless loophole whereby an individual, in order to escape a fine, need only conspire with their firm to have an e-mail chain telling them what to do. I understand the purpose behind the amendment, but I do not think that that is the right thing to do.
I appreciate the hon. Gentlemans desire to protect employees who find themselves performing a controlled function without approval in a situation where they may feel that they have no choice but to do that, but someone performing a controlled function is playing a key role within a firm. The role is important enough to warrant the checks that come with approval, and we think that individuals with such significant roles should have matching levels of responsibility. What we need is not passive employees who know that responsibility can easily be shirked in favour of the firm. That would not improve compliance.
Of course, we need to make sure that the sanctions are targeted appropriately, and I would like to draw the Committees attention to the safeguard built into the clause to ensure that the FSA cannot be unduly severe. The new power cannot be used against individuals who did not know, or could not reasonably be expected to have known, that they were performing a controlled function without approval. We are not trying to catch out individuals who act in good faith.
The ultimate purpose of the clause is to discourage individuals from performing a controlled function without approval by threatening them with a disciplinary sanction. Such a measure will improve compliance and enable greater FSA scrutiny of persons who are carrying out controlled functions. If we were to allow the individual to escape all responsibility, or to limit the scope of the power to such an extent that it became almost inapplicable, we would not meet our objectives. I therefore urge the Committee to resist the amendments.

Mark Hoban: Welcome to the Chair this afternoon, Mr. Gale.
When we get to the clause stand part debate, I would like to try to probe a bit further the issue of who will be affected by the provisions. Various comments have been made to me about the sort of people who will be caught by the measure. I take the Ministers point that amendment 1 may be too loose and may leave too many loopholes. He suggested that some safeguards were in place to protect an individual in such a situation. I am trying to distinguish between those people who deliberately set up a structure that allows them to fall outside the scope of clause 16, and those who inadvertently fall within it. I take the Ministers point that that could give rise to some artificial arrangements.
The Minister makes a fair point about where responsibility lies. Should we ask individuals to take more responsibility for their actions within a firm and to understand what the regulators expect of them? Whether there is a legitimate reason to be concerned will depend on how the rules are applied by the FSA. Having given the FSA new powers in the Bill, we look forward to hearing what safeguards it builds in when it starts to consult on the application of those powers. I am happy to accept the Ministers reassurance that adequate safeguards are built in, so I ask the Committees leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment 6, in clause 16, page 20, line 25, leave out four years and insert one year.
This is a brief probing amendment. Clause 16 defines the limitation period as the period within which, from the date that misconduct takes place, the FSA can take action against an individual who undertook controlled functions without approval. What I want to know is: why four years? It seems a long period of time, but it is not the six years that applies under the statute of limitations. Why is four years the right period of time? Should that period be longer? Or should it beas I suggest in my amendmenta year, to give the FSA greater focus in looking out for such people and in trying to tackle the issues more quickly, so that the matter does not hang over an individual for what appears to be quite a long period?

Ian Pearson: I appreciate the probing nature of the amendment. It might be helpful if I put clause 16 and the amendment into context by drawing the Committees attention to clause 17, which relates to the amount of time available to the FSA to initiate disciplinary proceedings against persons who appear to the FSA to be guilty of misconduct. Currently, the FSA has two years before it must start proceedings against individuals that it believes are guilty of misconduct. We want to extend that to four years, and have made an amendment to that effect through clause 17, which we will hopefully come on to discuss in a moment.
A four-year limitation period is an appropriate time for the FSA to investigate individuals, whether they are suspected of misconduct or of performing a controlled function without approval. Let me explain why. The starting point for the provisions is that we should ensure that the FSA has enough time to prepare a case against an individual suspected of breaching the rules. There are a number of ways in which such individuals might take advantage of the current period of two years to prevent the FSA from conducting an investigation. For example, it has been known for individuals to be deliberately obstructive in order to run down the clock, hoping to escape sanction as a result. In the case of individuals performing control functions without approval, that could involve delaying the provision of information needed by the FSA to ascertain what type of role the person was undertaking, and that is clearly wrong.
Equally, a person could launch judicial review proceedings against the FSA asking a court to review the commencement of an investigation. The clock would continue to tick during such an appeal, and that would severely limit the FSAs ability to carry out an investigation within the required time when the judicial review had finished. A sufficient period is therefore vital to allow the FSA enough time to deal with complex cases. While it could mean that complex cases take longer, it is important to allow such time to ensure that the FSA can effectively and thoroughly investigate incidences of wrongdoing and impose appropriate penalties.
I hope that the examples of judicial review, deliberately withholding information and playing it long have helped to convince the hon. Member for Fareham of my argument. I could probably cite examples of potential criminal cases that would take precedence, as a result of which the FSAs work would only start to take place after it had been decided whether or not to prosecute. For those reasons, it is reasonable to have a period longer than two years at the moment. It is a matter of judgment whether the period is three, four or five yearsand our judgment is that four years seems appropriate. It will address directly some of the problems that I have outlined in my brief contribution.

Mark Hoban: I thank the Minister for his response. He has advanced an interesting argument. It relates to subsections (4) and (5) of proposed new section 63A. We have a limitation period of four years from the first day on which the authority knew that the person concerned had performed a controlled function without approval. The Minister put forward a good reason why a four-year period should apply and explained how someone might seek to frustrate it. In circumstances where the police had identified an offence, perhaps the hon. Member for Wolverhampton, South-West, who is a lawyer and has perhaps dealt with such matters in criminal cases, knows whether they are restricted to a four-year period. The offence would surely have been started. There was a motion of investigation by the FSA that it should not necessarily be a limitation period at all, given that that is how one might seek to frustrate the period. It is arguing that counter case that a year is not long enough.

Rob Marris: I am not an expert criminal lawyer, but I refer the hon. Gentleman to proposed new section 63A(4), where the clock can be stopped by the issue of a warning notice. The FSA could do that. I am slightly concerned that a four-year limitation period could become an excuse for the FSA to do nothing for years, because there would be no sword of Damocles over it. It would simply need to issue a warning notice, and that would stop the clock.

Mark Hoban: I wondered about that as well, but proposed new section 63B(2) states that a
warning notice must state the amount of the penalty.
For the FSA to have issued a warning notice, it would have had to have gone some way through the investigation process with some certainty that the person had breached the rules, and that a penalty should be imposed for that. Is there a better way of giving the same flexibility to pursue such matters if there is time-wasting? A more generous limitation period does not seem quite the right way in which to tackle that potential mischief. I apologise for giving the hon. Member for Wolverhampton, South-West more legal expertise than perhaps he is ready to profess on this occasion.

Rob Marris: On this occasion.

Mark Hoban: Yes. Perhaps we should debate the timing. I am not comfortable that the mechanism is right although I accept the objective that the Minister is hoping to achieve, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment 7, in clause 16, page 21, line 18, leave out subsection (5).

Roger Gale: With this it will be convenient to discuss amendment 8, in clause 16, page 21, line 23, leave out subsection (7).

Mark Hoban: Amendments 7 and 8 are fundamentally probing amendments to understand why the subsections must be in the Bill. Subsection (5) of proposed new section 63C states:
The Authority must, without delay, give the Treasury a copy of any statement which it publishes under this section.
I wonder why the authority has to give the Treasury a copy of the notice, given that it was on the FSA website. Everybody else has to rely on the FSA website to find that information. Why should the Treasury be treated in a special way, compared with other people interested in that statement? Why should the authority be able to charge a fee for the provision of that statement? Will the FSA now try to impose a charge for content, going down the same lines as some national newspapers, as people access its statements on the website? I am not sure why the two subsections are at all necessary.

Ian Pearson: The subsections are entirely consistent with the provisions for other policy statements in the Financial Services and Markets Act 2000; for example, policy statements on fines imposed on approved persons in section 69 of the Act, statements on fines imposed on those that breach the listing rules in section 93, and statements on fines imposed for market abuse in section 124. Therefore, the provisions in clause 16 simply ensure that the requirements that are in place for other penalties policy statements issued by the FSA, also apply to policy statements on penalties imposed on non-approved persons performing controlled functions.
Moreover, I cannot see the rationale behind the view of the hon. Member for Fareham that those should be removed. To my mind, it is natural that the regulator should inform the Government how it proposes to use a particular power conferred on it by Parliament. Similarly, I do not think it unreasonable for the FSA to be able to recover the cost of printing its policy statements by charging a reasonable fee to those who wish to receive hard copies. Of course, in practice, the vast majority who wish to read statements and policy can download electronic copies from the FSAs website for free. Logically, subsection (7) of new section 63C does not enable the FSA to charge for them. I do not believe that those amendments are necessary and I hope that with those few words of clarification, the hon. Gentleman will seek leave to withdraw his amendments.

Mark Hoban: I am still not convinced why the Treasury should be singled out for special treatmentbeing sent a copywhen the people who are regulated by the FSA, the people who foot the bill, will not necessarily be sent one of those statements automatically. However, it is not an issue that I am prepared or particularly want to press; it is a point of interest. Having had my curiosity assuaged, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment 13, in clause 16, page 21, line 26, leave out from must to any in line 27 and insert comply with.
This is another amendment that has been tabled in order to seek clarification. Subsection (8) states:
In exercising, or deciding whether to exercise, its power under section 63A in the case of any particular person, the Authority must have regard to any statement of policy published under this section.
We see this happen elsewhere in FSMA, where the FSA has to have regard to in various aspects of policy. There is what a number of people refer to as the have regard to factor in part 1 of the policy in section 2(3) of FSMA, where (a) to (g) refer to various things that the authority must have regard to. It is not bound to comply with those, but it must bear those factors in mind when trying to discharge its general functions, which are set out elsewhere in that section. If the FSA has gone to the trouble of having a policy to deal with people who undertake controlled functions without approval, and we believe that there are sufficient safeguards in that section to prevent people suffering enforcement action when they have a reasonable defence, why should the FSA simply have regard to? Why does it not simply comply with the policy statement that it has published? It is very straightforward. If there is to be a policy, let it comply with it rather than say, We will just think about it and not always comply.

Ian Pearson: We could obviously have a wider debate about comply with and have regard to. Amendment 13 refers to the need to comply with, rather than have regard to, the statement of policy in relation to the level of fines imposed on non-approved persons performing controlled functions. I appreciate the sentiment behind the amendment expressed by the hon. Member for Fareham, which is to ensure that the FSA applies the standards set out in its statement of policy. However, again referring to a point I made earlier, the language he proposes would not be consistent with that of other policy statements on penalties that the FSA is required to produce, as set out in FSMA. Again I would refer him to sections 69, 124 and 210 of FSMA, all of which refer to the need for the FSA to have regard to its policy statements.
The current language fulfils a specific purpose. Policy statements are intended as guidance and the term have regard is the usual way in which public authorities are required to take guidance into account. There may be exceptional circumstances where it is appropriate for the FSA to depart from its policy and the expression have regard enables it to do that. The FSA would, however, need a good reason for doing so. In practice, the amendment would achieve very little. In order to ensure that it could in all cases comply with its statement, the FSA would almost certainly resort to publishing a very high-level statement, which would be of little use to the entities it regulates. That would have the result of making the FSAs published policy less clear. I want to reassure the Committee that drawing attention to the FSAs duty to act reasonably and proportionately in all cases provides additional safeguards to how that is interpreted. Put simply, that is common practice when agencies are producing policy statements. They would have regard to them and only depart from them with very good reason. It is established that this is the right sort of expression to use and I hope that the hon. Member for Fareham will be persuaded of the appropriate terminology.

Mark Hoban: If it is written like this elsewhere in FSMA, it is a good idea to write it like this in the Bill. If I had realised that consistency was such a virtue, I might have tabled amendments to change other bits of FSMA to bring them in line with my amendment. I am not sure that either I or the Committee would want to spend time doing that, Mr. Gale, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I want to probe the Minister a little further on the need for these powers and to get a better understanding of the circumstances in which they might be used. I am concerned about a recent example that I have seen: a company can be subject to enforcement action by the FSA that results in the company going into administration; the administrator is able to sell the companys list of clients and transfer the employees to another company. The reason why the first company has been subject to enforcement action is that the activities it undertakes are clearly in breach of the rules, and some quite serious offencesor breach of the ruleshas occurred. However, it then appears that the same type of operation is re-established under a different name, with broadly the same people, not long after the first company has been wound up. I think such companies are described on the FSAs website as phoenix companies. People are familiar with such a situation occurring with double glazing and in a range of other areas, but it has also happened in relation to the sale of securities to individuals.
Before lunch, I tried to get the name of the company and the particular set of circumstances, but unfortunately I failed. However, I know that it has happened. In such a situation where there are relatively senior employees who are not approved people, yet who appear to be integral to the operation of that business, there seems to be no limit to their being able to move into another company and carry out exactly the same practices. Another set of consumers will then be fleeced by that company and the FSA will have to start the whole enforcement process again.
Will the powers that the FSA will get in the Bill be sufficient to take out that level below approved persons, who are fundamental to the business, to stop them from setting up another business in the same guise when their principals have perhaps been barred from working in the City?

Ian Pearson: I got slightly lost part of the way through the hon. Gentlemans example, but I began to understand it again at the end. Certainly, on the issue of phoenix companies, which he raised, what he describes is an unacceptable practice. In the past, some companies have sought to operate in such a way. One company will close and another that looks virtually identical will be set up the next day. That is not something that the Government support, and the FSA will always want to look closely at that issue.
On what clause 16 does, as the hon. Gentleman is aware, a company already has to show reasonable care when it comes to appointing individuals to a control function. Through clause 16, we are also putting in place an individual responsibility, which is a helpful way of ensuring that there is a credible deterrent. The measure is not necessarily in itself designed to solve the sort of situation that the hon. Gentleman describes, where, in effect, all or most of the senior members of the company are acting in a way that they should not. However, if individuals are not fit and proper, they can be prohibited and thereby excluded from the industry. That applies both to people performing control functions and to other people within the firm.
Through clause 16, we are closing a loophole. It is important to ensure that control functions are performed by people who are fit and proper to do so. Taking a belt-and-braces approachfocusing on both the individual and the firmbut also having the safeguards I mentioned earlier, is the right way to proceed. I hope that the Committee will feel able to support clause 16.

Question put and agreed to.

Clause 16 accordingly ordered to stand part of the Bill.

Clause 17 ordered to stand part of the Bill.

Clause 27

Restrictions on provision of credit card cheques

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I hoped that the Minister might say a few words about clause 27, but given that I am quicker on my feet than him or any other member of the Committee, I will say a few words, because the clause is a useful provision.

Roger Gale: Order. Just to set the record straight, it is customary for the Opposition to speak first on a clause stand part debate. The Minister can then respond.

Mark Hoban: Thank you for that guidance, Mr. Gale. That is not something I had divined from the pattern followed on Bill Committees that I have served on since I came to the House, but there we are. There is always an opportunity to learn from the wisdom of the Chairman on such occasions. The only problem with that situation, Mr. Gale, is that we are not quite sure what the Minister will say, but sometimes I find that I end up saying it for himor her, depending on which Minister it is.
Clause 27 tackles quite a serious problem relating to the availability of credit to households in this country. We need to remember that British consumers have a personal debt equal to the personal debt in France and Germany combined. I am told that there are more credit cards than people in the UK. I came across someone last week who had 13 credit cards, which I thought was quite a lot.

Mark Todd: The average is five per adult.

Mark Hoban: That is a phenomenal number. I think we would all accept that access to credit is a good thing; it helps even out some of the ebbs and flows in income and expenditure. However, a situation can arise where the access to credit is too easy, and it leads people who perhaps are not fully conversant with their finances to a situation in which they increase their take-up of consumer credit. The area that has always bemused me is credit card cheques, which are the subject of clause 27. I have to confess that it took me a long time to realise that they were cheques. When I received them through the post, I assumed that they were simply a marketing device. I now know that they are not just a marketing device but access to credit. I assumed that the cheques were just a marketing gimmick, and I do not think that I am alone in having thought that.
I suspect that there has been a reasonably high degree of fraud as a consequence of some of those marketing devices. The cheques are seen as another cheap and easy way for people to get credit. In its written submission to the Committee, Which? said on credit card cheques:
These tend to have higher APRs and handling fees, offer less favourable repayment conditions, are unpopular with consumers and have been blamed for increasing fraud. We believe it is right that consumers should only receive credit card cheques if they have specifically requested them.
It went on to say that it welcomes
the measures to achieve this.
I suspect that the measure in the Bill has support from across the House. It is interesting that even the publication of the Bill and the clear intention of the Government to legislate on the issue has not stopped credit card companies sending out credit card cheques. In fact, my wife received some at the weekend, which we duly shredded.

Charles Walker: Just in time for Christmas.

Mark Hoban: As my hon. Friend says, the cheques came just in time for Christmasclearly a time to encourage my wife to spend money. It was right to shred the cheques and to keep a firm grip on domestic finances. There are limits to my powers, however. That demonstrates just how wedded the credit card industry is to the idea; it knows that credit card cheques are about to be banned, but it still continues to use them.
There were expectations outside the House that the Government would go further than they have done in the Bill when it comes to credit card cheques. My hon. Friend the Member for Tatton (Mr. Osborne) said on Second Reading that he agreed with Which?, which has said:
we are disappointed that the Government has not taken further measures against irresponsible lending in the Bill. There is a clear need to avoid a return to the pre-credit crunch days and the wide-ranging consultation recently published identifies important issues.
Such details were highlighted in the consultation published by BIS on consumer credit. Which? stated further that
The delay in publication has resulted in a missed opportunity and we are concerned, given the stage in the Parliamentary cycle, that the chance to act will be missed.
The Prime Minister is aware of the issue of consumer credit; he said:
we are determined to do our bit...when we see hard-working, hard-pressed people being buffeted about by a storm not of their making.
We were under the impression, as I think Citizens Advice and Which? were, that the Government and the Prime Minister had pledged, at a meeting on the culture of credit earlier in the summer, to take the earliest opportunity to ban unsolicited credit card limit increases. There is some surprise that that is not covered in the Bill, and that all we see is a minimum payment, as it were, towards redeeming that pledge.
Other issues to do with tackling the growth of credit include points relating to minimum payments, unsolicited credit increases, the re-pricing of existing debts and the order of payment. Unfortunately, the consultation that the Department for Business, Innovation and Skills has proposed will close on 19 January, the week after we finish our work in Committee. If only the usual channels had been more generous, in terms of the amount of time allowed for scrutiny, we in this place would have had some time to scrutinise the outcome of the consultation, and the Government would have been able to table additional amendments to reflect the outcome of the consultation. Will the Minister clarify the Governments intention on redeeming their pledge to legislate against unsolicited credit limit increases, and on the other areas subject to consultation in the BIS White Paper?

Ian Pearson: The hon. Gentleman is probably right that there are a number of individuals who have been sent unsolicited credit card cheques in the post and do not recognise what they are. They are, in effect, the same as current account cheques, but with some important differences. There is a danger that people do not take them seriously enough to ensure that they dispose of them in a safe and effective way. There is certainly some anecdotal evidence that unsolicited credit card cheques have been used by individuals who obtained them fraudulently.
Credit card cheques are provided by many credit card issuers. They have a similar appearance to ordinary bank account cheques, and once used, they appear on a credit card statement in the same way that an item purchased with the card, or a cash withdrawal made using the card, does. However, they attract a higher rate of interest than card purchases, do not have an interest-free period, tend to attract a handling feeusually at 2.5 or 3 per cent. of the amount of the chequeand do not offer protection under section 75 of the Consumer Credit Act 1974, whereas a purchase made with a card does. Under that section, as hon. Members will know, the creditor is jointly liable with the supplier in the event of a problem with the goods and services.
Every year, huge numbers of credit card cheques are sent to customers. Some 292 million credit card cheques were distributed in 2008, of which around 95 per cent. were unsolicited. Less than 1 per cent. of the cheques sent out were used, but there are signs that they are being used by customers in financial distress. Survey evidence from uSwitch in November 2008 suggests that 23 per cent. of the people who use credit card cheques use them to transfer cash into their current accounts; 16 per cent. paid utility bills with them and 7 per cent. used them to consolidate debts. One credit card issuer actually suggests in the information that accompanies its cheques that consumers can use them to pay utility bills.
There is a risk and, as I said, some evidence that vulnerable consumers are using the unsolicited cheques to get themselves into higher debt. The high costs often associated with such cheques, and the fact that those costs may not be fully appreciated by many customers, can make the situation worse. uSwitch found that 86 per cent. of consumers surveyed could not identify the correct fee charged by their provider, and even the most informed and sensible consumer can find it hard to master the complex terms and conditions attached to credit card cheques. The purpose of the clause is to ban a practice that can tempt consumers to increase their borrowing when they may already be in financial distress. We are not proposing to ban credit card cheques entirely. Used wisely, they can provide useful flexibility for the consumer, but we want to put consumers in the driving seat, which is what clause 27 does.

Rob Marris: I appreciate that proposed new section 51A, as inserted by clause 27, would impose pretty severe restrictions on credit card cheques for consumers, but why does proposed new section 51B provide a total exemption for businesses? Businesses, particularly small businesses, could also get into the very difficulties to which the Minister referred with regard to consumers. In a sense, they could be running on a credit card, which is not a great way to run a business.

Ian Pearson: Although unsolicited credit card cheques have been identified as a problem for consumers, we do not believe that there is a similar consumer protection justification for restricting their use by businesses. That is why proposed new section 51B exempts credit card cheques for business use from the prohibition. If my hon. Friend has evidence that there is detriment to businesses as a result of the practice, obviously the Government would want to consider it at a future date.
I do not propose to go through all the details of the different subsections of the clauses. The general principle of restricting the use of credit card cheques is welcomed in all parts of the House, and that is important.
On the points made about unsolicited credit limit increases, we are looking at the issue as part of the review of the regulation of credit and store cards. We are considering a number of options, including a ban on the practice, or requiring customers to opt into credit limit increases. The review is still out to consultationuntil 19 January 2010and final recommendations will be published in spring 2010.

Charles Walker: Does the Minister share my view that it is rather depressing that so many financial institutions are so opposed to the concept of responsible lending and to providing a sensible level of service to their customers? I am deeply concerned that we are having to bring forward such legislation. It seems to me that many of the banks might have picked up the messages, coming out of Government and the Opposition parties over the past couple of years, that such practices are unacceptable. The banks should not need to have to comply with legislation to do away with them.

Ian Pearson: I have some sympathy with what the hon. Gentleman says. The situation is patchy. Some lenders take a more enlightened approach to their activities than others when it comes to this area. We always need to make sure that we have effective regulation and that throughout primary legislation we take powers, when we believe them necessary, to ensure that the consumer is properly protected. That is why we are taking action on credit card cheques in the Bill.
As I indicated, we are consulting on unsolicited credit limit increases and on minimum payments. In many ways, we would have hoped that action in such areas was not necessary, but there has been significant evidence that consumers are getting themselves into difficulty as a result of some of the enticing offers that seem to be there from those that want to lend them money. We need to make a judgment as to whether we need to act in the future to prevent some of the practices.

Andrew Love: All the written and spoken evidence that we received from consumer organisations was that while credit card cheques affect a small number of incredibly vulnerable consumers, unsolicited credit increases affect a much wider range of consumers. According to the evidence put before us, such increases have been important in the explosion of credit in recent years, which we are now trying to deal with.
I take the Ministers point about the survey currently being carried out, but will he give the Committee an assurance that if the evidence that comes into BIS suggests that something should be done in any of those areas, he will, at an appropriate timethe timing will be criticalbring forward amendments at a later stage of the Bill to incorporate such measures into the legislation?

Ian Pearson: I have always believed in evidence-based policy, with one or two caveats. It is important that we recognise that the evidence needs to be there.

Mark Hoban: Will the Minister give way?

Ian Pearson: In a moment. My hon. Friend the Member for Edmonton is right to point out that there has been a tendency for many people who have had their credit limit increased to spend up to that limit. Many people now want to reassess their financial circumstances and perhaps take different actions. In the past, the practice enticed them to get into higher levels of debt than they now feel comfortable with. That needs to be addressed.
To explain my caveat, I should say that sometimes in Government we have to act immediately, on a limited or non-existent evidence base. There are some situations when the evidence is there and we are too late. The danger is that we are always running to catch up. As a real aside, on the basis of the strict evidence the Government would not have introduced the car scrappage scheme; indeed, Treasury officials advised us not to. Our decision to do so was based on our belief that it would have a galvanising effect on confidence in the market. That has proved to be the case. In terms of the evidence of past schemes, it would not be something that we would do.
I had better not dilate any further on those points, Mr. Gale, other than to say that there is cross-party support for what we doing in the clause. We are looking at going further in other areas of consumer protection. As hon. Members will be aware, there are other consumer measures as part of the Bill and we will discuss them in the new year.

Question put and agreed to.

Clause 27 ordered to stand part of the Bill.

Clause 28

Contribution to costs of special resolution regime

Mark Hoban: I beg to move amendment 9, in clause 28, page 37, line 14, at end insert
(5A) The scheme manager may request the Treasury to appoint an auditor in accordance with the regulations set out in 214D(6) to confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power..
I am pleased that the Minister gave an example of a policy he supported without any evidence to back it up. That was going to be my intervention, but we have one on the record now. Veterans of the Banking Act 2009, such as the hon. Member for South Derbyshire, the Minister and the hon. Member for South-East Cornwall will remember the details of the financial services compensation scheme, but I should like to put my amendment in context for those who missed out on the great opportunity to serve on that Committee.
Professor Buiter, who gave evidence for the Treasury Select Committees report on Northern Rock and who did not get round to teaching me when I was at the LSE, argued that the financial services compensation scheme had nothing to do with financial stability and was purely social policy. As we know from the 2009 Act, the FSCS has become a fundamental part of the special resolution regime and it serves as a way to maintain financial stability when a bank or a building society is put into the special resolution regime. It has been used quite often now, with Bradford & Bingley and the Dunfermline building society, and it is an established part of that architecture. The 2009 Act put in place the legislative framework for the FSCS to act in this role.
We have today, a mere number of months since the Banking Act 2009 received Royal Assent, an opportunity to rewrite part of that Act as it applies to the FSCS and to introduce new section 214B into FSMA as well as some further safeguards. Proposed new section 214B confers a power on the Treasury to require the FSCS to contribute to the costs incurred in applying the stabilisation regime. The amount is limited to that which would have been payable in the counterfactual scenariothat is, if the bank in question had become insolvent and an independent valuer was appointed to calculate the likely amount of recovery.
Proposed new sections 214B and 214D bring some corrections and clarifications to the 2000 Act. Most significantly, in subsection 2 of the clause we have amended the provision so that it applies from 19 November 2009, which allows interest to be taken into account in calculating the FSCS contributions from that day onwards, when a special resolution regime power is used. The Bill gives the FSCS the ability to charge interest on the Dunfermline loan, a provision that was omitted from the previous Bill. When we passed the 2009 Act, the expectation was that the FSCS would bear the full cost, but because of the costs that the FSCS is likely to bear the Government decided to charge the interest rather than the resolution costs to the FSCS.
I will turn to my amendment in a moment, but I wish to ask the Minister a question about an issue that we touched on during the passage of the 2009 Act. I had hoped that the Minister would use this Bill to fill in a gap, and give the FSCS and all the levy payers a greater insight into what happens in the wind-up of the affairs of banks that are being bailed out. At the moment, the FSCS does not have a formal role in looking at the activities of institutions that are being wound up, and it does not know whether those activities will be wound up in a way that will minimise the costs to itself. It is difficult for it to understand just what the likelihood of recovery is, and the problem arises, therefore, of how much levy payers are likely to have to pay in the future. Greater transparency in that process would help, as would improving the governance arrangements. I wonder whether since our debate on the 2009 Act the Minister has given any further thought to the improvement of governance arrangements.
My amendment inserts a new subsection (5A) into proposed new subsection 214B, under which the scheme managerFSCSmay
request the Treasury to appoint an auditor in accordance with the regulations set out in section 214D(6) to confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power.
A question might be, Why do we need that, given that section 214D(6) provides for the independent verification of expenses incurred? This must be for the verification of other matters, and the regulations will be introduced about the appointment and payment of an auditor. The hon. Member for Wolverhampton, South-West will probably suggest that I should have tabled a further amendment to take out the powers under section 214D(6), but the point of my amendment is to focus more precisely on ensuring that the costs that the FSCSultimately its levy payerswill incur are strictly related to the exercise of stabilisation powers. The levy payers can therefore take some comfort in the fact that the costs being incurred are the right costs and they are not picking up a bill for anything else, and they can know that they are getting value for money for what they are paying out. The wording in my amendment makes the provision slightly tighter, and ensures that the levy payers get comfort in the absence of any other improved governance arrangements. That acts as a safeguard for those who ultimately have to pick up the bill.

Colin Breed: I support the amendment and the hon. Member for Fareham has said all the right things as to why it should be accepted. I want to add that, while the costs of the special resolution fall on the levy payers, it is actually members of the public who will ultimately have to pay for it. The costs will go back to the building societies, and you and I, Mr. Gale, and other members of the public, will be forced to pay the levies in one way or another. It is therefore important that the costs are contained and looked at. We also need to ensure that they are reasonable and that the reasons for them are addressed.
It was mentioned during todays Treasury questions that the Dunfermline building society has lost £26 million in costs, auditors fees, consultants and so on. That seems an extremely large sum of money for a medium-sized building society; £26 million is a lot of money. If that is to be covered by the levy payers, they will have to recoup the moneythey will do that in various waysbut it is ultimately the taxpayer, the depositor, the borrower and the customers of all those involved in the levy who will one day have to pay it. The issue is of genuine public interest.

John Howell: When I first read the clause, I was reminded of the words of Andrew Whittaker of the FSA during the evidence sitting. He warned us that costs will be sensitive and that at this stage we need to provide as much evidence as possible to ensure that we are reactive to that sensitivity. I am struck by how little there is in the clause about the auditors role compared with that of the valuer.
The two activities are actually quite similar, which raises an ancillary question. The cap on the limited expenses is set against a hypothetical scenario of insolvency. I have never been an insolvency practitioner, but I have worked alongside them and my impression is that, whatever the ground rules, what makes one practitioner better than another in what they can get out of an insolvency is their skill, their context and the way they use those principles.
The clause, however, offers a hypothetical scenario that is supposed somehow to set an average. It would be useful to know what principleswhich, it is alluded, will be implemented in regulationswill apply to ensure that we can see in detail and have a good understanding of what is going on behind the hypothetical scenario.

Ian Pearson: The hon. Member for Fareham shot his own amendment down when he referred to proposed new section 214D(6). As he knows, that section already provides for independent verification of special resolution regime costs, as does section 214B in its current form. It is difficult to see what a second level of audit or verification would add, and that second level would also be likely to be included in the SRR costs.
It might be helpful if I explain our view. The financial services industry as a whole benefits from the existence of a credible regime for bank resolution and depositor compensation, and the confidence that that provides to customers. It is right that when the authorities intervene to resolve a bank or building society that is failing, the industry, not the taxpayer, should pick up the tab. I think that is something that all our constituents would recognise.
Nevertheless, I recognise that many in the industry are concerned that that means that the authorities will have too little incentive to control costs. There is a feeling within the industry that there should be something akin to a creditors committee operating that would exercise greater cost control. I am not sure that the amendment would deal with such concerns.
The auditor would be required to check that the financial services compensation scheme was being asked to pay only for SRR costs and not other expenses of the authority, and he or she would not be asked to check whether those expenses were excessive or unnecessary. That can be done already. To reassure the Committee and those who follow these proceedings, I will set out what measures are in place to ensure that the FSCS contribution to SRR costs is properly controlled.
First, the FSCS contribution to SRR costs is capped to a level it would have had to pay out if the failed bank had gone into insolvency, as the hon. Member for Fareham rightly notes. That will still be the case after clause 28 is enacted. The clause simply ensures that interest is included in the costs. It is not possible for Government action under the SRR to result in the FSCS having to pay more than it would have had to pay if the Government had not intervened.
The second point is that in carrying out a resolution, the authorities must balance the five statutory resolution objectives, as we discussed at great length during the passage of the Banking Act 2009. The objectives already cover the key elements of a successful SRR actionprotecting financial stability, protecting depositors and protecting property rights. There is no need for an explicit least-cost-to-industry objective.
There are also measures in place for an independent assessment of costs that the FSCS may be expected to bear. As well as provision for the costs incurred in an SRR to be independently verified, the legislation explicitly requires the appointment of an independent valuer to calculate the amounts the FSCS would recover from the bank under a hypothetical insolvency.
It is vital that the authorities are accountable for action taken under the SRR, and the Government appreciate that industry has an economic interest in the outcome of the resolution, but so do the taxpayer and the wider economy. That is why, in exercising the SRR powers, the authorities are accountable through Parliament to the wider public for how they have gone about achieving the special resolution objectives.
The statutory limit on the FSCS contribution to the SRR costs ensures that the industry will not have to pay more than it would have done if the firm had failed and the Government had not stepped in. That is the fundamental point to appreciate. I hope that my explanation clarifies the situation with regard to FSCS contributions to SRR. [Interruption.] I invite the hon. Member for Fareham to withdraw his amendment.

Mark Hoban: I am pleased that the hon. Member for Leeds, East found the Ministers answer acceptable on this occasion. In Tuesdays evidence session, he told a witness that their answer had made him happier than the Ministers. Clearly, the Minister has been working on the quality of his answers to keep the Whip happy.
Let me explain my concern. The Minister said that the levy payers will have to pay out no more than they would have done had the business become insolvent and the normal operation of the FSCS been applied. That almost gives a credit card limit. As we said in an earlier debate, people will spend up to the limit rather than trying to control costs. While the measure might cap the upside of the potential exposure, it does not give levy payers the reassurance that costs have been incurred wisely and carefully with a view to minimising their costs.
My amendment is better than the Governments proposal on this occasion. Verification would be easy, because it would just require someone to check that the costs had been incurred. Before I came to the House I was an auditor. Verification simply means saying, This is what is in the records of the resolution authority. These are the invoices that have been received and paid out again. It a very mechanical process that requires little judgment. I am looking for a process that goes further than that and includes a check to ensure that the costs are
wholly, exclusively and necessarily incurred
in pursuit of the resolution regimeto use language from elsewhereand in respect of the exercise of the stabilisation powers. My wording is tighter and would give more comfort to levy payers.

Rob Marris: The hon. Gentleman tempts me to return to an earlier pointwe have come full circle. Proposed new section 214D(6)(c) says
may contain provision about the appointment and payment of an auditor.
Why did he not draft a simpler amendment changing may to shall?

Mark Hoban: The Treasury will, of course, draw up the regulations, whereas the amendment would give the scheme manager the power to request that the Treasury appoint an auditor. A bit more control would pass to the FSCS and a bit less to the Treasury. I could have finessed the drafting and tinkered around a bit more, but I wanted to get a point across. This should be considered from the levy payers point of view.
The hon. Member for South-East Cornwall was absolutely rightultimately, the customer of the bank or building society will pick up the cost. Anyone who has had a conversation with building society senior executives over the past year will know the extent to which they believe that the costs to the FSCS have impacted on the rates that they can offer savers and charge mortgage payers, so there has been a flow-back.
I want to see what additional governance arrangements could be put in place to reassure the people who are paying the levy that the expenses incurred would be reasonable. The opportunity for the scheme manager to put in an auditor to look at the subject more tightly might help to get that reassurance across. I am still not content that the governance arrangements properly balance the interests of the taxpayer, the resolution authorities and the people who ultimately have to foot the bill. We rehearsed these issues a little during the passage of the 2009 Act and it has been useful to explore them again.

Ian Pearson: At risk of prolonging the debate, I can understand the hon. Gentlemans point about a scheme manager, but I do not accept that his amendment is superior to what the Government propose. He said that he was asking for more than verification, but I do not see how his amendment would achieve that. It suggests only that the auditor should
confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power.
He seems to be saying something that his amendment would not deliver.

Mark Hoban: I disagree. We need to ensure that the costs incurred are properly controlled and the Bill does not get us to that point, frankly. The Ministers assurance about a cap on the amount that levy payers would have to pay if a bank went through the usual processes with the FSCS is not adequate to reassure levy payers and, ultimately, the customers of those institutions. We need to find a way to tighten up that process; this may not be the right way, but other aspects of the resolution regime need to be determined as well. We may come back to those at some point and tighten them up.

Rob Marris: The hon. Gentlemans seems to have implied that reasonably is in the third line of his amendmenthave been reasonably incurred. He seems to be addressing it, although it is not there. That addresses the point made by the Minister, who rightly criticises the amendment for not including the words reasonably incurred, and therefore being about mere verification rather than the audit the hon. Gentleman seeks.

Mark Hoban: One thing that I have learnt serving on Committees with the hon. Gentleman over the past four or five years is that he and I should talk about amendments before I table them. He adds that extra bit of finesse that might avoid at least one set of interventions. He gives me food for thought that might encourage me to return to the point on Report. On that basis, and as I have the opportunity of the Christmas recess to cogitate further, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 28 ordered to stand part of the Bill.

Clause 29

Power to require FSCS manager to act in relation to other schemes

Question proposed, That the clause stand part of the Bill.

Mark Hoban: This relatively straightforward clause tries to formalise something that already exists. It concerns the powers to require the Financial Services Compensation Scheme to act in relation to other schemes. Under the provisions, the FSCS can make payments on behalf of other compensation schemes, including arrangements that do not relate to other authorised financial services firms under the Financial Services and Markets Act 2000.
The impact assessment is quite instructive in explaining the motivation behind the provisions. It states:
In 2008 the FSCS went beyond its formal remit to ensure that eligible claimants in failed banks were fully compensated for their deposits, including those in the UK (Icesave) branch of... Landsbanki...by paying the compensation due from the Icelandic deposit-guarantee scheme.
The key word in that passage is formal, because what we have seen, in effect, is the FSCS acting in relation to other schemes. It would appear to have done so successfully last year, but I suspect that it is probably one of those areasthere are several cases in the Billwhere people have acted to do the right thing but have not necessarily had the legal basis to do it, so it would be helpful to put such things on a more formal footing.
I do not think that there is anything particularly objectionable in the clause, but a couple of points emerge. The Association of British Insurers has pointed out that the EU is looking at compensation schemes on a cross-border basis at present, and whether it should plan to include one compensation scheme acting as the agent of another as part of its reform of the deposit guarantee schemes directive.
As we clearly have interim arrangements that work, is it appropriate for us to push ahead with the measures in the Bill when we may have to revisit them as a consequence of an EU directive? Given that there are moves around the EU to harmonise rules in this area, why should we react now? Why not wait until the directive is formalised?
The British Bankers Association in its representation suggested that the Bill as drafted will permit the FSA to make rules that allow the FSCS to levy UK deposit takers for irrecoverable management expenses incurred in respect of overseas schemes. I am all for UK deposit takers picking up the tab for resolving problems around UK institutions, but are we sure that we understand the true extent of the additional liability that deposit takers will take on if they are to recover the FSCS management expenses as a consequence of administering overseas schemes? In the discussions Ministers have had with their counterparts in Europe about the move to a harmonised directive, have they discussed any provision for a scheme acting as an agent on behalf of another scheme recovering such costs from the home states deposit protection scheme and its levy payers, rather than having to recover them from UK levy payers?

Ian Pearson: The power to require the FSCS manager to act in respect of other schemes has been widely welcomed by respondents to the Reforming financial markets consultation. They agreed that the measure will be of real and practical assistance to depositors. Respondents to the consultation were keen to stress that the authorities must ensure that there is no additional cost to FSCS levy payers. That is the point that the hon. Gentleman raised. I confirm that that has always been the Governments intention, and that the Bill includes suitable safeguards to ensure that in carrying out the new function, the FSCS will take on minimal financial risk. When it is acting on behalf of another scheme or authority, that scheme or authority will be expected to meet all the compensational costs and additional management expenses incurred by the FSCS in making the payout. The FSCS will be able to decline to act if it is not satisfied that funding is being, or will be, provided to meet the expenditure and expenses it will incur. A number of other grounds on which it may decline to act are set out in detail under the clause.
On the wider point made by the hon. Member for Fareham about the European Commissions consultation on co-ordinating deposit guarantee schemes, it has always been the Governments view that effective cross-border arrangements for deposit compensation are crucial to ensure the protection of depositors and confidence in the banking system. It is well known that the FSCS has already had to act as a paying agent for a foreign scheme, so the provision is a basic measure to ensure that it has the legal basis for that co-operation so that United Kingdom depositors can be paid out quickly and effectively, which is in customers best interests.
Our approach is fully compatible with the existing provisions of the deposit guarantee scheme directive. If the directive is revised in the light of the Commissions report, we consider that the measures are likely to be compatible with any such revisions. Of course, there is always the unlikely event of some incompatibility and, in those circumstances, the Government will take the usual approach and use the powers under section 2(2) of the European Communities Act 1972 to make any necessary amendments. However, we believe that what we are doing is consistent with what seems to be an emerging approach that will be operated on a pan-European basis.

Andrew Love: I apologise for asking a probing question, but the Treasury Committee received a great many representations from people with deposits in offshore centres, particularly around the United Kingdom. Are there implications for people in those circumstances? Will they continue to have to look to the offshore centre for compensation?

Ian Pearson: Yes, that is the case. The situation is very much the same as has been outlined previously. It depends on the identity of the host regulator, which we have made clear on several occasions.
The measure has been welcomed as a result of the consultation exercise that we conducted. We are introducing it under the Bill, and I hope that the clause is accepted.

Question put and agreed to.

Clause 29 ordered to stand part of the Bill.

Clause 30

Information relating to financial stability

Mark Hoban: I beg to move amendment 12, in clause 30, page 46, line 8, at end insert
( ) The powers in section (1) can only be exercised where the overseas regulator is also able to provide the Authority with corresponding information.
( ) Corresponding information means information the overseas regulator can obtain in respect of financial stability from a person operating in the country or territory of the overseas regulator..

Roger Gale: With this it will be convenient to discuss amendment 11, in clause 30, page 46, line 20, at end add
( ) In pursuit of these powers, the Authority will have regard to section 348..

Mark Hoban: It may be helpful if I give a little background to amendments 11 and 12. Clause 30 introduces a new power for the FSA to require information in pursuit of its objective in connection with financial stability. It is a broad power, which is helpful because it will enable the authority to collect the necessary information to ensure that it can exercise its financial stability objective. The information will also help the Bank of England to exercise its obligations and have regard to the financial stability objective that was introduced under the Banking Act 2009. Of course, we are still left with the problem of what financial stability means and what information the authority will be required to collect if we do not know what financial stability is in practice, but it is difficult to argue against the need for collecting such information.
We need to make sure that there are some safeguards because potentially the powers are broad. Our safeguards under proposed new section 165B cover the right to make representations against the requirement to provide information and a duty on the FSA to publish a statement of its policy with respect to the exercise of the new powers. However, there is no right of appeal, and the right to make representations may be excluded by the FSA in the case of an emergency. In the FSAs consultation on these new rule-making powers, it will be important for it to be explicit about the circumstances in which the powers would be used and in which the emergency override would be used.
I want to focus on new section 169A, which will be inserted in FSMA. That new section deals with when an overseas regulator has asked the authority to exercise its powers under section 165A, so that the overseas regulator can obtain information through the FSA in connection with financial stability. As a consequence of the current crisis, we know that there needs to be greater global harmonisation and co-operation on the supervision of individual institutions and supervision on a macro-prudential level.
The discussions taking place in the European Commission, the Council and, indeed, the Parliament about the new authorities in Brussels demonstrate that there will be much more co-operation. Of course, one of the important tasks of the European systemic risk board is to gather information about financial stability across Europe. Clearly, the board will need to have access to information from member states to enable it to fulfil its responsibilities in analysing emerging trends.
I am wary about whether there will be two-way traffic between the UK and overseas regulators, and I am concerned that there could be a situation where an institution is based in a number of different jurisdictions. It may be the case that the lead regulator is in South Africa, Germany, Australia or wherever it may be and it requests as part of its financial stability remit that the FSA provides information on a firm that it regulates in the UK. As a nation, we are very compliant when it comes to requests and following instructions, and doubtless the FSA will want to meet such a request. However, it is important that the FSA does not just supply information to, for example, the home estate regulator or the regulator that takes lead responsibility globally for that company without being able to get information itself from the overseas regulator about some of the firms that it supervises, if the FSA is pursuing such a line of inquiry as part of its role to help to maintain financial stability in the UK.
There are some very big businesses operating in the UK who are headquartered overseas and whose activities could have an impact on financial stability. If we were not able to get information from their lead regulator country about its view of somethingfor example, the amount of capital the institution has back home or the practices that the board of directors has introduced in relation to capital, risk management and a whole host of such thingsthere might be a direct impact on financial stability in the UK. My amendment would ensure that there is some reciprocity between the UK and other regulators.

Mark Todd: The hon. Gentleman will recall that I raised that matter last Thursday in the evidence session, when he slightly implied I was not present. I wonder whether he shares an additional concern about the inclusion of the word territory. I am unfamiliar with the concept of the financial stability of a territory rather than a nation state, yet that is one of the tests that may be employed. I understand why that word is used; I suspect it enables us to deal directly with some regulators in US states, where many financial institutions are regulated, but I wonder how the test of financial stability implied in the clause would be applied in that instance.

Mark Hoban: The hon. Gentleman asks a very good question and it is not something I had pondered. I recollect the exchanges about reciprocity that we had on Thursday afternoon. I do not know how one assesses a territory, or financial stability issues around the state of Delawarewhere a large number of companies are headquarteredor the fact that some insurance companies are based in the USA. I suspect the Minister might say that some Crown Dependencies may be described as territories rather than countries in the legal sense. I do not know whether that is what the Minister is aiming at. I think there may be territories linked to the United States that are not states. It may be around that area, and I am sure the Minister will have an answer.
In terms of my amendment, imposing the duty of reciprocity gives the FSA some leverage in its relationship with other supervisors to say, You must have these powers. Supply us with information, if we are to supply you with information. It is not a very friendly approach to take, perhaps, but it ensures that the FSA can exercise some leverage to help ensure better information flows between states, rather than simply expecting the UK to be the one that gives but never receives.
The debate we had this morning on the inclusion of section 348, in the discussion of disciplinary powers, crops up again in the second amendment I have tabled in this area. It concerns the sort of information about a company that the FSA could give; what duty of confidentiality would bind it; how much granularity of information a regulator could ask for and the use to which it is put. I suspect that might be addressed by the representations a firm could make, but it would be helpful to know the boundaries that the FSA and the Government think are in place to protect confidential data.

Mark Todd: It is a pleasure to serve under your chairmanship, Mr. Gale. I have already made a point about the definition of one of the terms in the clause and would welcome an explanation of that.
I have quite a lot of sympathy with the amendment, with one exception. If the FSA were prevented from providing information to a regulator unless a reciprocal arrangement were in place, one can think of certain emergencies when that would be an extraordinarily unfriendly act. For the Government of this country simply to impose an obligation to say, I am sorry. We do not have a reciprocal arrangement in place. Obviously we need to negotiate that, but some information is needed desperately, would be almost an aggressive act of assisting in the collapse of a countrys financial system.
There are circumstances in which I could imagine the clause being used appropriately to assist a state in distress. However, the generality of the argument presented by the hon. Gentleman, which is that this ought to be balanced by an appropriate arrangement with another state, ought to be the negotiating position generally adopted, with one further qualification which is implicit in it. That is, that we should have a clear understanding of the regulatory frameworks of other states that we are dealing with, and there should be some degree of quality test and peer exchange of information, to ensure that we provide additional support and advice in those circumstances.
One thing we have learnt thoroughly from the past couple of years is the interdependence of different regulatory functions in different states and the impact of large corporate entities across borders. Therefore, the goal of the clause is entirely sound and I have sympathy with the argument presented, with the exception I have given.

Ian Pearson: I will deal with amendment 11 first, before moving on to amendment 12 and the points my hon. Friend the Member for South Derbyshire raised. Amendment 11 provides that, in exercising its powers to gather information, which are already substantial under FSMA, the FSA would have to have regard to section 348 of FSMA. That section generally restricts the disclosure of confidential information, subject to the exceptions set out in section 349, which permits disclosure for the purposes of facilitating the exercise of a public function where disclosure is in accordance with regulations made by the Treasury.
The requirements set out in sections 348 and 349 of FSMA apply to all confidential information gathered by the FSA under that Act. The ability to disclose confidential information obtained under new section 169A, inserted by clause 30 of the Bill, to an overseas regulator is already subject to section 348. The amendment is therefore unnecessary, and I hope that that clarifies matters for the hon. Member for Fareham. The amendment is not only unnecessary, but undesirable, as it would introduce uncertainty as to whether disclosure by the FSA of information it has obtained under other powers is subject to section 348. An explicit reference to section 348 in that regard might be taken to imply that the section does not apply to other information-gathering powers contains in FSMA that do not have an equivalent explicit reference. I hope, therefore, that the hon. Gentleman will not press amendment 11.
I will move on to amendment 12 and address the wider point about reciprocal co-operation. My hon. Friend the Member for South Derbyshire and the hon. Member for Fareham made valid points, as we do need to see extensive international co-operation on the whole issue of regulation. Indeed, one of the key focuses of the Governments activity has been through the IMF, through international regulators and through regulation at a European level, all of which are necessary.
Amendment 12 would mean that the FSA could not use the new powers to assist an overseas regulator unless that regulator was able to provide it with corresponding information. I do not think that is necessary or desirable. The FSA is not obliged to respond to information requests from overseas regulators, but it will naturally want to consider them closely and co-operate when those requests are reasonable. Section 169(4)(a) of FSMA, which applies to that provision, states that in deciding whether to exercise its powers in support of an overseas regulator, the FSA may take into account, in particular, whether corresponding assistance would be given to a UK regulatory authority in the country or territory of the overseas regulator concerned.
We would not expect the FSA to co-operate with an overseas regulator unless it was in its long-term interests to do so, but I do not agree that it would be sensible to remove entirely the FSAs discretion to decide whether to respond to information requests where the overseas regulator, for whatever reason, was unable to provide it with corresponding information. We can certainly envisage situations in which that might be the case and would not want to prevent the FSA using the new powers, where appropriate, to build co-operation and encourage change. Again, I think that it is vital that we promote best international standards and engage with other international regulators, and we want the FSA to do that.
My hon. Friend the Member for South Derbyshire raised a point about the use of the word territory. It is to allow us to capture illegal jurisdictions below the level of the nation state; for example, states in the US. We believe that it is necessary to capture that.

Mark Todd: Will my hon. Friend clarify that a little? The test that I think is imposed in the clause as it stands is that the financial stability of that territory should be the basis on which the request might be considered and made. I am not reasonably familiar with the financial affairs of the US, but I imagine that the state of Delawarenot the government of Delaware, but its financial stability as a place where people might liveis guaranteed by the US Government. It is hard to see how one could imagine the financial stability of an individual American state, which is the example he gave, being placed in jeopardy by the actions of particular institutions based here.

Ian Pearson: I will reflect on that point further. My hon. Friend makes an interesting point. He mentioned Delaware; one could equally mention California, which, if it was a country, would be one of the top 10 countries in the world, economically. In designing the legislation, we have tried to get appropriate coverage and we believe that we have done that.
I do not believe that amendments 11 and 12 are necessary or desirable for the reasons that I have given. I hope that the hon. Member for Fareham will seek leave to withdraw them.

Mark Hoban: I have a vision of California seeking that information and the Governor perhaps changing his name from the Terminator to the Regulator on that basis. I appreciate the comments made by both the Minister and the hon. Member for South Derbyshire. Perhaps my amendments have gone a little too far in their wording, but I am anxious to avoid ending up in a situation where we have no levers over other regulators to provide information in a reciprocal situation. In many ways, we lead the field in reforms to financial regulation. We need to encourage other nations to step up to the plate when it comes to information exchange and disclosure. This might not be the right way to do it, but it must link through the G20 and the EU to other mechanisms that people use. There was a phrase I saw earlier today about financial regulation. It referred, I think, to the US and whether it will embrace everything but act on nothing. It is very easy to pay lip service to the intentions behind information exchange. It is a different matter to get them to introduce the legislative change that is required to facilitate information exchange. There needs to be a lot of work done at international level to get comparable powers accepted as part of the regulatory regime of other member states and other jurisdictions. I am sure that we will be very good at sharing information, but the FSA should be encouraged to think very carefully about the terms by which it provides information, and the opportunities provided by its membership of international forums to push the message that there must be effective information exchange.

Colin Breed: I share some of those concerns. A scenario could occur where it is asked to provide information that could implicate people here, who would then immediately be the subject of an extradition order. The information that we supplied to other countries could allow them to do that. We do not have reciprocation in extradition at present with the US. There are some concerns. To get co-operation and everything else, we want to ensure that co-operation is accepted elsewhere. The only safeguard is the wording that says may: we do not have to, but we mayor we may not.

Mark Hoban: The hon. Gentleman makes an important point about the language, but we need to ensure that, if we are to recognise the reality of global financial institutions and global co-operation over their regulation and supervision, there is acceptance of that and it has to be underpinned by information exchange. We need to do all that we can through a range of different forums to ensure that that happens. But there must always be that opportunity for the FSA to apply a bit of muscle or leverage here to encourage others to be as open as it is prepared to be. With that in mind, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 30 ordered to stand part of the Bill.

Clause 31

Asset protection scheme etc

Mark Hoban: I beg to move amendment 10, in clause 31, page 47, line 4, at end add
(10) The Treasury will lay before Parliament a report on the losses incurred by the person participating in the scheme which are included within the qualifying scheme.
(11) The first report will be laid for the period from 26 February 2009 to 30 June 2009 and will be laid six monthly thereafter until the relevant scheme agreement has expired..
The amendment relates to the asset protection scheme, with which Committee members from all parties will be fully conversant. That scheme is the deal through which the taxpayer supports the Royal Bank of Scotland by providing an insurance policy for the losses it makes on some of its assets. The scheme has been in design for some time: it was announced in February, when the original agreement was tabled with RBS and Lloyds. We went through a subsequent iteration of the scheme recently and Lloyds was able to buy itself out of the arrangements, but RBS is still taking advantage of those.
Clause 31 puts some obligations on RBS and gives the Treasury the opportunity to request information or documents from RBS. In my amendment I was suggesting that the Treasury should provide us or the taxpayer with a bit more information. We are standing behind RBS and are prepared to underwrite its losses, so it would be helpful if, on a six-monthly basis, the Treasury laid before Parliament a statement setting out the losses that have been incurred under the scheme so that it can keep a close eye on how much all this is costing us.

Ian Pearson: The amendment would impose in primary legislation an obligation upon the Treasury in relation to losses incurred by participants in the asset protection scheme. It further sets out a timetable for the reporting process: the first report to be laid for the period 26 February 2009 to 30 June 2009 and further reports to be laid every six months thereafter. Although I recognise what the hon. Member for Fareham is getting at, the Governments view is that the amendment is neither necessary nor desirable, because appropriate procedures are already in place to ensure accountability to Parliament in respect of reporting on any losses incurred under the asset protection scheme. I should like to explain why I believe that that is so.
First, the Treasury has already announced procedures for reporting publicly on losses incurred by a participant to the ATS. On 7 December 2009, the Treasury published on its website a document entitled Royal Bank of Scotland: details of Asset Protection Scheme and launch of the Asset Protection Agency, in which it was noted that in the 2009 Budget, the Treasury set out its assessment of losses on all its financial sector interventions. The document also stated:
Based on the due diligence of APS assets and assessment of the outlook for asset prices and the economy, HM Treasurys central expectation is that overall net losses on the insured pool of assets will not exceed the £60bn first loss. The direct cost to the taxpayer from the APS is therefore expected to be nil.
The document also explained that in the 2009 Budget, the Treasury set out its assessment of overall losses on all its financial sector interventions, including on the Government's equity holdings. In particular, it was stated that this assessment would be updated in the next pre-Budget report, and then in future Budgets and pre-Budget reports. It was also stated that the Treasury will make equivalent updates to its accounting treatment when producing its future annual report and accounts through the parliamentary estimates process.
Accordingly, in the pre-Budget report on 9 December the Chancellor set out the Government's expectation in relation to net losses on the assets covered by the APS. He explained that, based on due diligence of the assets and the outlook for asset prices and the economy, the central expectation is that net losses on the insured pool of assets will not exceed the revised £60 billion first loss that will fall to RBS.
Secondly, the Banking Act 2009 places a statutory obligation on the Treasury to prepare reports about any arrangements that involve or may require reliance on payments made out of money provided by Parliament for expenditure incurred by the Treasury when financial assistance has been given to a bank under section 228 of the 2009 Act. For that purpose, financial assistance includes Government guarantees. In the case of the APS, the Treasury will have to prepare reports under that Act about payments made in respect of 90 per cent. of the losses incurred over the first loss amount.
If the usual parliamentary estimates procedure is used, the Treasury will be required to prepare a report during each six-month period, beginning on 1 April and 1 October, in which payments are made. Those reports must be laid before the House of Commons, and the Treasury must aim to give as much information as possible in the report, subject to restrictions on the identification of individual arrangements or beneficiaries, and taking account of other public interest considerations.

Mark Hoban: Given that for the asset protection scheme there is obviously only one beneficiary, can we assume that we will be able to see the numbers for the asset protection scheme?

Ian Pearson: It is my understanding that that will be the case.
When there is urgency, such that payments are made out of the consolidated fund under section 228 of the Banking Act, the Treasury is obliged to report to Parliament as soon as reasonably practicable, specifying the amount paid, although it shall not identify the institution to or in respect of which it was paid. We have discussed that on the Floor of the House. We believe that the amendment would unnecessarily duplicate the existing reporting obligations that I have outlined at length, and which are substantial.

Mark Hoban: The Minister talked about two sets of information, and I want to check that we have the full deck of cards here. He referred to the statements made by the Chancellor in the pre-Budget report and the Budget about the expected level of losses, and said that those losses would fall within the £60 billion limit. He also referred to the payments to be made under the scheme. Those payments would be made if the losses exceeded £60 billion. How would we know how far through that £60 billion layer RBS had got? Would we know, for example, twice a year that RBS had incurred losses of, say, £10 billion at the end of a six-month period, and that at the end of the next six-month period the losses had risen to £20 billion? Would we know what losses had been kept in the pool of assets covered by the APS, even if no payments were expected to be made, or had been made in respect of that pool of assets?

Ian Pearson: As I have indicated, we would certainly report to Parliament on losses incurred over and above the £60 billion limit. We said at the time of the PBR that we did not expect such losses to occur on the basis of our central assumption. I also indicated that we would need to report on matters at the Budget and the pre-Budget report process in future. I would imagine that we would want to report on the Governments liabilities at that time.

Mark Hoban: Can the Minister understand what I am concerned about? We might end up in a situation where it is expected that there will be no losses, and where RBS is sitting just below the £60 billion threshold. We could then suddenly be told in the next pre-Budget report that there was an expectation of £20 billion in losses, because RBS had blown through the £60 billion. How will we monitor how far below that £60 billion RBS is?

Ian Pearson: The best that I can do is explain the process that we go throughand indeed have gone through recentlyin the pre-Budget report and the Budget, due to the exceptional circumstances. A lot of work went on before the pre-Budget report to consider the central case, with regard to the asset protection scheme. We would want to conduct a similar exercise, or take a similar view, in considering and reporting the central case at Budget time and, should it be necessary, in future pre-Budget reports and Budgets. An assessment of whether the central case was still the same would need to be conducted at that time.
We are publicly committed to reporting on losses. There is no reason why we should not do that. I am told that the section 231 reporting procedure applies. If RBS did burn through its first loss, there would be a report, but I do not think that the intention is to provide regular updates about how far things had got. However, as I have said, we would need to assess the situation at each Budget and each pre-Budget report, given the potential Government liabilities.

Rob Marris: I am a bit concerned about what the Minister is saying, perhaps because I do not understand it, as I freely admit. It appears that we could get into a situation where there are several beneficiaries under the scheme, the Government are incurring expenditures of billions of pounds and nobody outside the charmed circlecertainly not parliamentarians or the publicwill know who is receiving those billions. If that is the case, it is deeply worrying.

Ian Pearson: I do not believe that that is the case. I have tried to explain that we have a process of reporting through the pre-Budget report and the Budget. We also have annual accounts and the estimates process. The procedure that I was explaining is as follows. During the run-up to this pre-Budget report, we calculated what we thought a central loss case would be on RBSs assets, as RBS is the only company in the asset protection scheme. I have no doubt that similar work will go on in the preparation of the 2010 Budget, given the significant scale of the asset protection scheme. Indeed, I have no doubt that the Treasury Committee will want to examine the work of the Asset Protection Agency in that area.

Andrew Love: Yes, the Treasury Committee has moved carefully on that. I must say that I am certainly reassured that the possible losses under the scheme have decreased significantly since the time of the Budget, when I understand that they were £20 billion to £50 billion overall. That is not just under the asset protection scheme but as a result of all the Governments exposure to the banking crisis. That figure has decreased to £10 billion, so we are reassured. We are also reassured by the renegotiation in relation to the Royal Bank of Scotland; that provided for an exposure of up to £60 billion before the Government must put their hand in their pocket.
I accept that the appropriate way to report is through Parliament, but is not the difficulty the continuing level of uncertainty out there? The amendment calls for a report on losses; it is not yet appropriate to say that they have crystallised, but you have given a commitment here today

Roger Gale: Order, on two counts: first, I have given no commitment at all, and secondly, it is a long intervention.

Ian Pearson: I appreciate what my hon. Friend the Member for Edmonton says about the way in which such matters are being scrutinised. He is right to point out that in the pre-Budget Report we announced that our assessment of the potential liabilities as a result of our interventions has gone down from £50 billion to £10 billion.
It is always the practice that if expenditure is incurred, it is reported to Parliament, and that will remain the case. However, it needs to be recognised that we have to be as open and transparent as possible when it comes to the contingent liabilities that the Government have taken on regarding the asset protection scheme. Any Government will want to report if there are significant adverse circumstances. As we indicated at the time of the pre-Budget Report, we thought that the situation had improved substantially, so we could change our assessment. I believe that we would want to have a similar assessment conducted on our potential liabilities, which should be announced at the Budget. That would be the normal thing to do, and would provide an adequate level of scrutiny and challenge.

Rob Marris: I still do not quite understand. Is the Minister saying that if there were several beneficiaries in the asset protection schemeI understand that it is not the case at the moment, but there might be; the Presbyterian Mutual Society in Northern Ireland, for example, or other institutionswith outstanding liabilities for and actual expenditure or cost to the Government, under the current regime, the taxpayer and Parliament would not know the identities of the institutions to which those sums related, and would get only the gross figures?

Ian Pearson: No, I am not saying that at all. There is only one member of the scheme at the moment, and the Government anticipate there being only onealthough we cannot foresee future events. Participation in the asset protection scheme would normally be a matter of public record, and one would expect that if an organisation were to participate in it, it would be clear public knowledge.
We have gone into the issue in some detail. There are a number of ways to ensure proper public scrutiny of what we are trying to do. There is absolutely nothing that the Government want to hide on this issuewe just want to ensure that we have the right reporting arrangements, and we believe that we have achieved that.

Mark Hoban: I am not sure that I am quite as convinced as the Minister is by the strength of his arguments. We will have two pieces of data: we know the actual payments the Government have made as a consequence of the £60-billion layer of insuranceonce RBS has burnt through itand we will have the Governments estimate on whether we will have to make additional payments to RBS. The former will be in the public domain as a consequence of the reporting requirements under the Banking Act 2009, but the latter is a judgment, which will be published by the Government at the time of the Budget and the pre-Budget report. By the sound of things, the Government will not provide us with where RBS is, at the point they make the judgment between £0 and £60 billion. The Government may judge that it is unlikely that any payment will be made, but RBS could be up to £59 billion. However, we would not know it from the information published by the Treasury.
I appreciate that it is a dynamic process, and the hon. Member for Edmonton was right to say that some of that would be based on provisions, not crystallised losses, but that is the same for any company publishing its accounts. One publishes ones accountif it is a provision for a liabilitybased on the probable extent of the liabilities. The information I am looking for may be published in the RBS accounts. Its shareholders may want to know where it is at on that pool of assets between the £0 and the £60 billion.
It would help parliamentary scrutiny if alongside the Governments estimate of its expected liability they published where RBS is at that point in terms of the 0 to 60 range. People in Parliament could then decide whether the Governments estimates are fair, over-optimistic or unduly pessimistic. Being presented with the number that the Government think is the estimated loss does not give us any context in which to gauge whether their judgment is reasonable. That is an additional piece of information that I would like to see published.

Andrew Love: Would the hon. Gentleman accept that the level of uncertainty here is significant? I assume that most of the figures that he seeks from the Minister are deposited with the RBS, which must put a valuation on its assets and has indicated that it will have a programme of sale of assets. Only when it goes to market and realises a value for those assets will we know in truth what the situation is in regard to this asset deposit scheme.

Mark Hoban: I am not sure that I buy that, to be honest. I agree with the hon. Gentleman that this is a dynamic process and that the bank will look at the assets it holds and will put a value against them. That value will change depending on the circumstances of the individual business and of the economy. It is a dynamic process. That is the basis on which all the banks publish their annual reports. People are comfortable with that variability. It should not frighten parliamentarians to have to deal with that degree of uncertainty. That is why it should be possible for the Government to tell Parliament what the latest estimate is of where RBS is in that 0 to 60 range.
The Government are producing an estimate of their expected value of losses. Why can we not see what RBS currently estimates that book of assets as part of the APS to be worth and what losses it has incurred so far on that book of assets? I do not think that it is unreasonable to ask the Government to produce that little bit more transparency about the losses incurred to date by RBS in the pool of assets in the APS. Due diligence has been done. The Government know what assets should be included in the APS. I am sure that RBS as part of its internal procedures will do its own valuation of that pool of assets from the APS.
I want to make sure that there is a mechanism for Parliament to be aware of that rather than rootling through the highways and byways of RBSs annual accounts. Having looked at the annual accounts of one bank relatively recently, I know that there are pages and pages of disclosure. I was about to say that it makes the Red Book look transparent, but I had better not go down that route. But it is complex disclosure. There is an opportunity to present some more information to Parliament that enables Parliament to judge how realistic the Governments estimates are and to have proper parliamentary scrutiny about where we are on the 0 to 60 range.
The dates in my amendment may not work, but the point I am making to the Government is that they should let us have that additional piece of information so that we can hold them to account about where they are in terms of their estimate, rather than simply having a figure for expected losses and then knowing what the payments might be. Let us know where RBS is in that 0 to 60 range. We have discussed this for some time and I hope that the Minister has taken the point on board.
Ian Pearsonindicated assent.

Mark Hoban: He nods. We will see where we get to on this. The taxpayer has signed up to quite significant potential contributions to rescue these banks and it would be helpful to know exactly where we are on that. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 31 ordered to stand part of the Bill.

Clauses 32 to 34 ordered to stand part of the Bill.

Roger Gale: I remind hon. Members yet again that amendments for the next sitting will have to be tabled by 4.30 pm on Wednesday 30 December. The Table Office will not open during the new year holiday. The next sitting will be on Tuesday 5 January. May I take this opportunity to wish all members of the Committee and the Officers of the House a pleasant Christmas and a peaceful new year?

Ordered, That further consideration be now adjourned. (Mr. Mudie.)

Adjourned till Tuesday 5 January at half-past Ten oclock.